CASE STUDY: GUYANA S EXPERIENCE WITH PARIS CLUB AND COMMERCIAL CREDITORS

1. CASE STUDY: GUYANA�S EXPERIENCE WITH PARIS CLUB AND COMMERCIAL CREDITORS Donna Yearwood, Ministry of Finance Debt Negotiation and Re-Negotiation Workshop Jamaica, 6-10 November 2006

2. Outline Overview of the Paris Club Guyana�s Economic Background Evolution of Paris Club Engagements The Wider Search for Debt Sustainability Comparable Treatment Clause Relations with Non-Paris Club Bilateral Creditors Observations and Lessons Learnt Experience with Commercial Creditors Experience with Litigation Conclusions Discussion Questions

3. Overview of the Paris ClubWhat is the Paris Club? Informal group of official creditors initially created to provide debt relief to debtor countries with temporary liquidity problems, with the aim of preventing imminent default. Paris Club is voluntary and has no legal status Debtors approach the Paris Club when they can�t meet their debt obligations Since 1979, the French Treasury has provided a permanent secretariat responsible for the preparation and coordination of meetings in Paris, acting as Chairman

4. Paris Club Participants Debtor countries Participating creditor countries (Paris Club member countries: Canada, Denmark, France, Germany, Japan, The Netherlands, UK, USA, Russian Federation and Trinidad & Tobago) IMF plays an advisory role International organizations as observers (UNCTAD, IDB, World Bank)

5. Key Requirements of the Paris Club Agreements are reached following a number of rules and principles agreed both amongst creditors and between creditor and debtor countries. These key requirements are as follows: Case by case basis Consensus Conditionality Solidarity Comparability of treatment The key requirements of the Paris Club are described below. The Paris Club makes decisions on a case by case basis in order to permanently adjust itself to the individuality of each debtor country. Consensus: no decision can be taken within the Paris Club if it is not the result of a consensus among the participating creditor countries. Conditionality: debt treatments are applied only for countries that need a rescheduling and that implement reforms to resolve their payment difficulties. In practice conditionality is provided by the existence of an appropriate programme supported by the IMF, which demonstrates the need for debt relief. Solidarity: Creditors agree to implement the terms agreed in the context of the Paris Club. The Paris Club preserves the comparability of treatment between different creditors, as the debtor country cannot grant to another creditor a treatment less favourable for the debtor than the consensus reached in the Paris Club. The key requirements of the Paris Club are described below. The Paris Club makes decisions on a case by case basis in order to permanently adjust itself to the individuality of each debtor country. Consensus: no decision can be taken within the Paris Club if it is not the result of a consensus among the participating creditor countries. Conditionality: debt treatments are applied only for countries that need a rescheduling and that implement reforms to resolve their payment difficulties. In practice conditionality is provided by the existence of an appropriate programme supported by the IMF, which demonstrates the need for debt relief. Solidarity: Creditors agree to implement the terms agreed in the context of the Paris Club. The Paris Club preserves the comparability of treatment between different creditors, as the debtor country cannot grant to another creditor a treatment less favourable for the debtor than the consensus reached in the Paris Club.

6. Prior to approaching the Paris Club Debtor countries must: Demonstrate that they are not able to meet their financial obligations Prepare a detailed memorandum on the macroeconomic situation, with emphasis on the projected BoP and debt burden Prepare a detailed request outlining the type of debt relief they hope to obtain and present a review of all debt stock and scheduled debt service Implement a Structural Adjustment Programme supported by the IMF (PRGF, formally ESAF, SAF)

7. Procedures Debtor country formally seeks meeting with Paris Club Creditors seek clarification on the debt situation Debtor presents case to Paris Club Various organizations (IMF,IDB,WB, UNCTAD, etc) make formal statements during the plenary session French Treasury representative acts as a mediator between the debtor and the creditors. There are no face to face negotiations Agreed Minutes are signed at the conclusion of the Paris Club multilateral debt negotiation meetings. The negotiations are not legally binding. Separate bilateral negotiations take place subsequently. These can take years to complete.

8. Agreed Minutes These stipulate: Debt which is eligible for debt restructuring and relief The consolidation period The cut-off date (Guyana: 1988/12/31) The total amount of relief to be received The terms and conditions of the debt relief. For example, the grace period, maturity and interest rates which are subject to bilateral negotiation Goodwill Clause where creditors agree to consider subsequent debt relief agreements without commitment DIMINIMIS Level is the level below which debt will not be rescheduled. For example for Guyana, SDR�s 500 000

9. Eligible Debt Paris Club agreements generally apply to the following: Official loans from Governments or appropriate institutions of the participating creditor countries. Public and publicly guaranteed medium and long term debts. Short term debt (debt with a maturity of one year or less) is usually excluded from the treatments, as their restructuring can create a significant disruption of the capacity of the debtor country to participate in international trade. However, in Guyana�s case in the first rescheduling, the majority of the debt rescheduled was short-term. From the creditor side the debts treated are credits and loans granted, or commercial credits guaranteed by the Governments or appropriate institutions of Paris Club creditors. Credits granted before the cut off date. When a debtor country first meets with Paris Club creditors, the "cut off date" is defined and is not changed in subsequent Paris Club treatments and credits granted after this cut off date are not subject to future rescheduling. Thus, the cut off date helps restore access to credit for debtor countries facing payment difficulties. In Guyana�s case: Official loans from Governments or appropriate institutions of the participating creditor countries having an original maturity of more than one year, pursuant to December 31 1988. Commercial credits guaranteed or insured by the Governments or the Participating Creditor Countries or their appropriate institutions, having an original maturity of more than one year, pursuant to a contract or other financial arrangement concluded before December 31, 1988. Commercial credits guaranteed or insured by the Governments or the Participating Creditor Countries or their appropriate institutions, having an original maturity of one year or less, pursuant to a contract or other financial arrangement concluded before December 31, 1988. In Guyana�s case: Official loans from Governments or appropriate institutions of the participating creditor countries having an original maturity of more than one year, pursuant to December 31 1988. Commercial credits guaranteed or insured by the Governments or the Participating Creditor Countries or their appropriate institutions, having an original maturity of more than one year, pursuant to a contract or other financial arrangement concluded before December 31, 1988. Commercial credits guaranteed or insured by the Governments or the Participating Creditor Countries or their appropriate institutions, having an original maturity of one year or less, pursuant to a contract or other financial arrangement concluded before December 31, 1988.

10. Guyana�s Economic BackgroundGuyana and Haiti were the only severely indebted countries in the region. 1970-1989 Characteristics Per capita income below US$1000 High inflation Limited range of exports Poor physical and institutional infrastructure High external debt

11. Severe debt problems

12. Economy deteriorates Increase in external vulnerability Decline in creditworthiness Worsening relations with international community Need for new approach to the external debt situation

13. Debt Strategy 1988: ERP launched to shift the economy back to a market-oriented one. The ERP is monitored by the IMF. 1989: Guyana approaches the Paris Club 1990: Arrears owed to multilateral institutions (IMF, WB, CDB) settled with financing from the Government, the Support Group and a temporary bridging loan from the Bank for International Settlement (BIS).

14. Evolution of Paris Club EngagementsParis Club Venice Terms May 23 1989: Paris Club agreed to Venice Terms Loans rescheduled on non-concessional terms Debt reduction of US$42million US$684m rescheduled debt Cut off date 1988/12/31 Short, medium and long term arrears were consolidated and rescheduled at high market interest rates (9%-13%). For example, short term over 10 years including 5 years grace; Medium and long term over 20 years including 10 years grace. Medium & long term debt service falling due from 1/1/1989 to 28/2/1990 were also rescheduled at high market interest rates over 20 years including 10 years grace

15. Paris Club Toronto Terms Guyana defaulted in 1989 on debt payments due to worsening economic situations which were exacerbated by the Paris Club reschedulings, limited foreign exchange and solvency problems September 12, 1990: Toronto Terms Menu approach granted 33% debt cancellation of maturities falling due within the consolidation period Rescheduling of interest and amortization arrears (including late interest) at market interest rates as at the end of the consolidation date (August 31 1990) Debt reduction provided under the Toronto terms was US$142million while the rescheduled debt totaled US$188 million Three year consolidation period. The length of the consolidation affects loan repayments Guyana�s efforts at macroeconomic stabilization and structural reform led to more favorable rescheduling terms with additional cancellation of debt totallingUS$247million as part of the goodwill arrangement (Canada, US, Netherlands, UK)

16. Paris Club Toronto Terms (cont�d) Menu Approach ODA Debt The treatment consisted of a rescheduling of 25 years maturity, including a 14 year grace period. In addition, the moratorium interest rate, that is, the interest rate levied on debt rescheduled or deferred, was at least as low as the original interest rate. Non ODA Debt Creditor countries could choose from various options: Partial write off: this option allowed for the cancellation of a third of the consolidated debt. The remainder was rescheduled using market interest rates, which had a maturity of 14 years, including an 8 year grace period Concessional interest rates: The consolidated debt was rescheduled using below market interest rates. The maturity of the new loan was 14 years including 8 years grace. Longer repayment periods: The consolidated debt was rescheduled with market interest rates over a 25 year maturity period including 14 years� of grace.

17. Paris Club London Terms/Enhanced Toronto Terms May 1993 50% write off on maturities falling due between 1 August 1993 and 31 December 1994 Debt reduction of US$40million US$80million rescheduled debt

18. Paris Club London Terms (Cont�d) The London Terms were formulated in 1991 to replace the Toronto terms and provided 50% debt reduction. ODA Debt This was rescheduled for 30 years, including a 12 year grace period, at interest rates at least as low as original interest rates at least as low as the original interest rates. Non-ODA Debt Creditor countries could choose between the following options, with the aim of achieving a reduction of 50% in the present value of the debt: Write-off: Cancellation of 50% of the service scheduled during the consolidation period. The remainder was rescheduled over 23 years, including 6 years� grace at the market interest rate Interest rate reduction: Rescheduling 100% of the consolidated debt with 23 years maturity, no grace period but low enough interest rates to reduce the present value of debt service by 50% Combining reduction of interest rates with partial interest payment capitalization. The repayment period was 23 years with 5 years� grace, and interest was not charged on the capitalized interest.

19. Paris Club London Terms (Cont�d) The London Terms introduced 2 major improvements to the Toronto Terms: Graduated repayment scheme to avoid a drastic rise in service payments at the end of the grace period. Inclusion of a clause stipulating that 3 or 4 years after the agreement, creditor countries would consider a reduction in the stock of debt.

20. Paris Club Naples Terms May 1996 67% reduction of eligible debt (present value) with remaining % paid over 23 years. Grace period of 6 years at market rates. Debt relief was US$529million Debt stock reduced from US$2billion to US$1.5billion. Debt service increased from US$104 million in 1996 to US$128 million in 1997 as debt service resumed to Trinidad and Tobago when they joined the Paris Club

21. Paris Club Naples Terms The Naples terms introduced for the first time an option designed to allow countries to exit from the debt restructuring process by reducing debt stock. The Naples Terms comprise the Flow Approach, which applies to service falling due within the agreed consolidation period, and the Stock Approach, which applies to the stock of the debt outstanding three years after the signing of an Agreed Minute for the Flow Approach under Naples Terms. To be eligible for the stock retreatment, a country needs to demonstrate that the outlook for its balance of payments is sufficiently strong to enable it to exit from further rescheduling following the reduction of its debt stock. Only HIPCs that had previously benefited from either the Toronto or London terms are eligible for treatment under the Naples Terms. Any loan that has already been refinanced must be treated with special terms in order to ensure that the debt relief on the total debt reaches 67%.

22. Paris Club Naples Terms (Cont�d) Flow Approach Non ODA Debt 50% or 67% reduction of present value of payments during the consolidation period. Creditors can choose: Debt reduction of 67%. The remaining debt is rescheduled over a period of 23 years, including 6 years of grace, at the market rate Debt service is reduced by 67% through rescheduling at reduced interest rates, over 33 years, with no grace period. Commercial Option where creditors can choose to reschedule debt service obligations over extended period at market rates. This option does not provide any debt reduction ODA Debt Concessional debt can be refinanced over a 40 year repayment period including 16 years grace Stock Treatment Non-ODA Debt Reduction of the stock of debt by 67% Creditors can choose between: Debt is written off by 67%. The remaining debt is rescheduled over a period of 23 years, including 6 years of grace, at the market rate Reduction of the present value of debt by 67%, through rescheduling at reduced interest rates, over 33 years with three years grace period ODA Debt Same treatment as in the flow approach

23. Paris Club Lyons Terms June 1999 Reduction on eligible debt from 67% to 80% in NPV terms Available only to HIPCs Countries could receive Lyons Terms on debt service (at decision point) and on their stock (at the Completion Point) In the same manner as previously implemented terms, the treatment offered different options for ODA and non-ODA loans.

24. Paris Club Cologne Terms January 2004 A reduction in the NPV of debt to 90% and more if needed to reach the new sustainability thresholds under the HIPC Initiative Nominal write-off of US$254million Remaining US$54million rescheduled All creditors were asked to forgive bilateral ODA debt of qualifying countries on top of the amounts required to achieve debt sustainability thresholds Guyana lobbied further and received 100% debt relief from 8 out of 10 creditors

26. The wider search for debt sustainability1. HIPC Guyana was 4th country to receive debt relief under HIPC By end 1999, external debt stock was reduced to US$1.2billion E-HIPC lowered Guyana�s NPV of debt-to-revenue ratio to 213% in 2003, 37% below the sustainability threshold.

27. The wider search for debt sustainability (cont�d)2. MDRI 100% cancellation of debts owed to IMF, IDA and AfDB. Guyana qualified for relief as post-Completion Point HIPC country From January 2006, IMF cancelled all outstanding debts incurred prior to 1 January 2005 From July 2006, IDA cancelled all outstanding debts incurred prior to 1 January 2004

28. The wider search for debt sustainability (cont�d) IDB debts were not included in the MDRI Discussions for debt relief with IDB are ongoing IDB is now the largest of Guyana�s creditors, representing over 50% of the existing debt stock

29. Comparable Treatment Clause A requirement of the Paris Club is that Guyana receives from its other bilateral and commercial creditors a treatment comparable to that received from the Paris Club. An exception has been made for multilateral creditors. As few creditors are willing to give a 90% debt reduction, this condition effectively forces Guyana to leave its non-Paris Club and commercial debts in arrears. These debts continue to increase at a rate of US$3m per annum.As few creditors are willing to give a 90% debt reduction, this condition effectively forces Guyana to leave its non-Paris Club and commercial debts in arrears. These debts continue to increase at a rate of US$3m per annum.

30. Comparable Treatment Clause (cont�d) Paris Club expects: Debtors to meet multilateral debtor obligations before other creditors That terms with other creditors will not exactly match Paris Club terms Debtors should share with them the results of negotiations Cases of comparable treatment are considered on a case by case basis These conditions have serious implications for Guyana�s non-Paris Club and commercial creditors.

31. Relations with Non-Paris Club Bilateral Creditors Progress is slow with non-Paris Club creditors Government has written to 11 non-Paris Club bilateral creditors with only 3 official responses In 2003, China & India wrote-off 100% of debt outstanding amounting to US$29 million and US$0.8 million respectively. China has further committed to canceling debts outstanding at the end of 2004 of about US$14 million Venezuela has given verbal agreement to write-off some debts

32. Non-Paris Club Bilateral Creditors (cont�d) Guyana does not service debt to non-Paris Club creditors Many non-Paris Club creditors are unwilling to provide such terms

33. Observations and Lessons Learnt The importance of the thorough preparation of your case. The need to have good, accurate and up to date records. The need for qualified and trained staff to manage debt discount conduct negotiations with the Paris Club. The need to constantly engage creditors in dialogue to secure relief beyond Paris Club suggestions. The official MFIs and others like DRI and INCTAD play a crucial role in presenting one�s case to the Paris Club and other creditors. The need to maintain a sound macroeconomic position to ensure growth and investment. Sustainable borrowing should also be pursued. Timing of the delivery of relief is crucial

34. Experience with Commercial CreditorsCommercial Buy Back 1991-92: Guyana bought back US$93 million worth of commercial debt stock and arrears owed to a syndication of commercial banks Financed by IDA Guyana extinguished all commercial bank debt and benefited from 89% discount

35. Experience with Commercial Creditors (cont�d)2. External Payments Deposit Scheme (EPDS) Buy Back 1999: Grant from IDA Debt Buyback Facility and the Swiss Government to clear arrears from commercial creditors Debt bought back as part of EPDS set up in 1970s when Guyana was experiencing BoP difficulties due to a shortage of foreign exchange. This buyback scheme retired US$34.4 million of commercial debt. The debt was bought back at a price of US$0.09 to the US dollar, representing a discount of 91%.

36. Experience with LitigationBig Food Group Booker plc (later Big Food Group) initiated proceedings in the ICSID on July 31, 2001. Intense lobbying by local and international bodies led to the creditor withdrawing the claim on March 17 2003. The withdrawal of the law suit effectively provided Guyana with a debt reduction of approximately �13 million. Guyana has been forced to face several cases of litigation as creditors seek to retrieve their money from the Government, which is unwilling and/or unable to settle these debts as a result of the comparable treatment clause. Guyana has been forced to face several cases of litigation as creditors seek to retrieve their money from the Government, which is unwilling and/or unable to settle these debts as a result of the comparable treatment clause.

37. Experience with Litigation (Cont�d)2. GUYMINE In 1992 Guyana assumed Guyamine�s liabilities The Government issued 19 bonds in 1994 to creditors of GUYMINE 4 creditors did not accept the bonds They brought their cases to arbitration to challenge the 1992 Bond Issue and recover the sum owed.

38. Experience with Litigation2. GUYMINE (Cont) Suspension of interest payments by the Government on the bonds issued to these companies Government special debt account Green Mining and Export Services took the issue to arbitration in both international and local courts seeking immediate payment Arbitration took 5 years and the Government won and received compensation of US$290,000 Esso and Caterpillar pursued arbitration in the local court, but withdrew their claims and accepted the bonds and the outstanding interest.

39. Conclusions Whilst Guyana has benefited from multilateral debt relief, the bulk of debt reduction was derived from the Paris Club. Initial rescheduling exacerbated the external debt problems With 6 Paris Club agreements, the Government has exited the wheel of the Paris Club negotiations. The focus is now on maintaining sustainable debt. Comparable treatment clause means debt relief from non-Paris Club creditors is not always easy. After MDRI, Guyana�s debt is now only $US0.8billion

40. The chart illustrates clearly the movement of the debt stock and debt service between 1985 and 2006. It depicts a situation of rapidly increasing debt stock and debt service in the 1980s and early 1990s, before falling gradually and then precipitately in the post 1999 period.The chart illustrates clearly the movement of the debt stock and debt service between 1985 and 2006. It depicts a situation of rapidly increasing debt stock and debt service in the 1980s and early 1990s, before falling gradually and then precipitately in the post 1999 period.

41. Current Debt Situation NPV of debt to revenue is projected to peak at 221%, below the 250% ceiling.

42. NPV of debt to government revenue ratio (%) The chart shows the NPV of Debt to Revenue ratio, both before and after the MDRI. Before the MDRI, the ratio was above the threshold, indicating a high risk of debt distress. The ratio peaked at 258% in 2007 and would have fallen below the threshold by 2012. After the MDRI, the ratio remains below the threshold throughout the period, peaking at 222% in 2011. This places Guyana at a medium risk of debt distress, under the IMF/World Bank classification. MDRI has ensured that debt remains at a sustainable level.The chart shows the NPV of Debt to Revenue ratio, both before and after the MDRI. Before the MDRI, the ratio was above the threshold, indicating a high risk of debt distress. The ratio peaked at 258% in 2007 and would have fallen below the threshold by 2012. After the MDRI, the ratio remains below the threshold throughout the period, peaking at 222% in 2011. This places Guyana at a medium risk of debt distress, under the IMF/World Bank classification. MDRI has ensured that debt remains at a sustainable level.

43. Discussion Questions How can other countries benefit from Guyana�s Paris Club experience? What were the main risks associated with using the Paris Club? What is the solution to the effects of the comparable treatment clause on commercial loans? Stock v. loan treatment: What are the implications for debt sustainability and the impact on the fiscal and external payments?